Wholesale Prices Steady in July

WASHINGTON - U.S. wholesale prices held steady in July as falling energy prices offset a surge in prescription drugs, giving the Federal Reserve no reason to raise interest rates next week.

The Producer Price Index for finished goods was unchanged in July, the Labor Department said Friday. The core index, which excludes usually volatile food and energy items, rose 0.1%. The stability eased inflationary pressures on the economy: Producer prices have risen 4.1% in the 12 months through July, down from a 4.3% rate in the 12 months through June.

These numbers matched Wall Street's expectations precisely and were expected to have little effect by themselves on stock and bond prices. Though economic growth has accelerated this year, the improving efficiency of U.S. workers has made the Fed confident that inflation will remain tame for the time being. Investors, as a result, say it's all but certain that the Fed will not raise interest rates when its top policymakers meet Aug. 22.

To keep inflation in check, the Fed has raised its key federal funds rate six times in the last year, to a nine-and-a-half-year high of 6.5%. The increases have had little effect on economic growth: From April through June the economy grew at a 5.2% clip, up from 4.8% in the first quarter.

Improvements in the productivity of U.S. workers were even bigger. For the year through June, labor productivity increased at a 5.1% rate, the fastest in 17 years. Such improvements reduce inflationary pressures because they allow companies to pay higher wages without raising prices. Wages, for example, have grown 3.7% in that period, and consumer prices have not shot up.

The second-quarter surge in productivity has validated Fed Chairman Alan Greenspan's view that the economy's capacity for faster growth without inflation has improved. Fed officials so far have expressed little alarm about the acceleration in economic growth during the second quarter. They say it will take evidence of inflation - not just strong economic growth - to provoke another interest rate increase.

The Labor Department attributed July's steady prices mostly to a 0.7% slump in energy prices after a 5.1% surge in June that caused gasoline prices in some parts of the country to rise above $2 a gallon. In July, gasoline prices fell 9.1%. But natural gas prices rose a record 6.2%, and electricity prices jumped 2%, the biggest gain in more than nine years.

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